Workshop on IFRS
KKTulshan
IAS 37
Provisions,
Contingent Liabilities and Contingent
Assets
IAS 37 v AS 29
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IAS 37
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Constructive obligation
Discounting
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AS 29
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No guidance
Objective
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Ensure that appropriate
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Are applied to
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Recognition criteria and
Measurement bases
Provisions
Contingent liabilities and
Contingent assets
And that sufficient information is disclosed in the
notes to understand their
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Nature
Timing and
Amount
Exclusions
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Executory contracts unless onerous contracts
Covered by other standards
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IAS 11
IAS 12
IAS 17
IAS 19
IAS 39
IFRS 4
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:
:
Constructions Contracts
Income-taxes
Leases
Employee Benefits
Financial instruments
Insurance Contracts
How about provisions for
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Depreciation,
Impairment of assets, and
Provisions for doubtful debts?
Provisions
Provisions
Definitions
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A provision
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is a liability
of uncertain timing or amount.
A liability
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is a present obligation of the entity
arising from past events,
the settlement of which
is expected to result in an outflow from the entity
of resources embodying economic benefits
Distinction – Provisions v Other liabilities
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A provision is a liability of uncertain amount or timings
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Trade payables are liabilities to pay for goods or services that
have been received or supplied and have been invoiced or
formally agreed with the supplier
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Accruals are liabilities to pay for goods or services that have
been received or supplied but have not been paid, invoiced or
formally agreed with the supplier, including amounts due to
employees
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Accruals are often reported as part of trade and other payables
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Provisions are reported separately
Recognition
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A provision shall be recognized when all the
following three conditions are met.
Condition 1: An entity has a present
obligation (legal or constructive) as a result of
a past event
Condition 2: It is probable that an outflow of
resources embodying economic benefits will
be required to settle the obligation
Condition 3: a reliable estimate can be made
of the amount of the obligation
Recognition – Condition 1
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An entity has,
as a result of a past event,
a present obligation (legal or constructive).
Recognition – Condition 1
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Past Event
The past event is known as obligating event
An obligating event is an event that creates a
legal or constructive obligation that results in
an entity having no realistic alternative to
settling that obligation
When no realistic alternative exists:
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When settlement can be enforced by law; or
When the event creates valid expectations.
Recognition – Condition 1
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Present obligation could be of two types: legal or constructive
A legal obligation is an obligation that derives from
 A contract (through its explicit or implicit terms)
 Legislation; or
 Other operation of law
Examples:
A constructive obligation is an obligation that derives from an
entities actions where:
 By an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities; and
 As a result, the entity has created a valid expectation on the part
of those other parties that it will discharge those responsibilities
Examples:
Recognition – Condition 1
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Probability of a present obligation
In almost all cases it will be clear that past event has
given rise to present obligation
In rare cases it is not clear whether there is a
present obligation
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Apply probability criteria
More likely than not
Consider all available evidence
Additional evidence – events after reporting date
Obligation should exists independently of entity’s
future action.
Recognition – Condition 2
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Probable outflow of economic outflows
Probable means more likely than not
Recognition – Condition 3
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Reliable estimate
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Rationally pay
Third party
Best estimate
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Consider
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Risks and uncertainties
Present Value
Future Events
Ignore
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Expected disposal of assets
Reimbursements
Measurement – General Rules
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Best estimate
Risks and uncertainties
Present Value
Future Events
Expected disposal of assets
Reimbursements
Measurement – Best Estimate
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The amount recognized as a provision shall
be the best estimate of the expenditure
required to settle the present obligation at the
end of the reporting period
The best estimate of the expenditure required
to settle the present obligation is the amount
that an entity would rationally pay to settle the
obligation at the end of the reporting period or
to transfer it to a third party at that time
Measurement – Risks and uncertainties
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The risks and uncertainties that inevitably surround
many events and circumstances shall be taken into
account in reaching the best estimate of a provision
A risk adjustment may increase the amount at which
a liability is measured
Caution is needed in making judgements under
conditions of uncertainty, so that income or assets
are not overstated and expenses or liabilities are not
understated
Uncertainty does not justify the creation of excessive
provisions or a deliberate overstatement of liabilities
Measurement – Present Value
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Where the effect of time value of money is
material, the amount of a provision shall be
the present value of the expenditures
expected to be required to settle the
obligation
Measurement – Future Events
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It is only those obligations arising from past events existing
independently of an entity’s future actions (ie the future conduct of
its business) that are recognized as provisions
Future events that may effect the amount required to settle an
obligation shall be reflected in the amount of a provision where there
is sufficient objective evidence that they will occur
Examples
Expected cost reductions associated with increased experience in
applying existing technology
However, an entity does not anticipate the development of a
completely new technology unless it is supported by sufficient
objective assessment
The effect of possible new legislation is taken into consideration in
measuring an existing obligation when sufficient objective evidence
exists that legislation is virtually to be enacted
Measurement –
Expected disposal of assets
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Gains from expected disposal of assets shall
not be taken into account in measuring a
provision
Measurement - Reimbursements
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The reimbursements shall be recognized
when, and only when, it is virtually certain
that reimbursements will be received if the
entity settles the obligation
The reimbursement shall be treated as a
separate asset
The amount recognized for the
reimbursements shall not exceed the amount
of the provision
Changes in provision
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Provisions shall be reviewed at the end of
each reporting period and adjusted to reflect
the current best estimate
If it is no longer probable that an outflow of
resources embodying economic benefits will
be required to settle the obligation, reverse
the provision
If there is no longer uncertainty about timing
and amount, the provision becomes a liability
Use of provisions
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A provision shall be used only for
expenditures for which the provision was
originally recognized.
Discussion 1 - Warranties
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A manufacturer gives warranties at the time
of sale to purchasers of its product. Under the
terms of the contract for sale the
manufacturer undertakes to make good, by
repair or replacement, manufacturing defects
that become apparent within three years from
the date of sale. On past experience, it is
probable (ie more likely than not) that there
will be some claims under the warranties.
D1 – Warranties – Solution
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Present obligation as a result of a past obligating
event:
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An outflow of resources embodying economic
benefits in settlement:
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The obligating event is the sale of the product with a
warranty which gives rise to a legal obligation
Probable for the warranties as a whole
Conclusion:
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A provision is recognized for the best estimate of the costs
of making good under the warranty products sold before
the end of the reporting period
Discussion 2 – Contaminated land –
legislation virtually certain to be enacted
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An entity in the oil industry causes contamination
but cleans up only when required to do so under the
laws of the particular country in which it operates.
One country in which it operates has had no
legislation requiring cleaning up, and the entity has
been contaminating land in that country for several
years. At 31st March 2009 it is virtually certain that a
draft law requiring clean-up of land already
contaminated will be enacted shortly after the yearend.
D2 – Contaminated land – legislation
virtually certain to be enacted - Solution
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Present obligation as a result of a past obligating
event:
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An outflow of resources embodying economic
benefits in settlement:
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The obligating event is the contamination of the land
because of the virtual certainty of legislation requiring
clean-up
Probable
Conclusion:
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A provision is recognized for the best estimate of the costs
of the clean-up.
Discussion 3 – Contaminated land and
constructive obligation
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An entity in the oil industry causes
contamination and operates in a country
where there is no environment legislation.
However, the entity has a widely published
environmental policy in which it undertakes to
clean up all contamination that it causes. The
entity has a record of honouring this
published policy.
D3 – Contaminated land and constructive
obligation
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Present obligation as a result of a past obligating
event:
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An outflow of resources embodying economic
benefits in settlement:
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The obligating event is the contamination of the land, which
gives rise to a constructive obligation because the conduct
of the entity has created a valid expectation on the part of
those effected by it that the entity will clean up
contamination.
Probable
Conclusion:
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A provision is recognized for the best estimate of the costs
of the clean-up.
Discussion 4 – Offshore oilfield
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An entity operates an offshore oilfield where
its licensing agreement requires it to remove
the oil rig at the end of production and restore
the seabed. Ninety percent of the eventual
costs relate to the removal of the oil rig and
restoration of damage caused by building it,
and ten percent arise through the extraction
of oil. At the end of the reporting period, the
rig has been constructed but no oil has been
extracted.
D 4 – Offshore oilfield
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Present obligation as a result of a past obligating event:
 The construction of the oil rig creates a legal obligation under the
terms of the license to remove the rig and restore the seabed and
is thus an obligating event. At the end of the reporting period,
however, there is no obligation to rectify the damage that will be
caused by extraction of oil.
An outflow of resources embodying economic benefits in
settlement:
 Probable
Conclusion
 A provision is recognized for the best estimate of 90% of the
eventual costs that relate to the removal of the oil rig and
restoration of damage caused by building it. These costs are
included as part of the cost of the oil rig. The 10% of costs that
arise through the extraction of oil are recognized as a liability
when the oil is extracted.
Discussion 5 – Refunds Policy
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A retail store has a policy of refunding
purchases by dissatisfied customers, even
though it is under no legal obligation to do so.
Its policy of making refunds is generally
known.
D 5 – Refunds Policy
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Present obligation as a result of a past obligating
event:
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An outflow of resources embodying economic
benefits in settlement:
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The obligating event is the sale of the product, which gives
rise to a constructive obligation because the conduct of the
store has created a valid expectation on the part of its
customers that the store will refund purchases
Probable
Conclusion:
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A provision is recognized for the best estimate of the costs
of refunds
Discussion 6 – A court case
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After a wedding in 2007, ten people died, possibly
as a result of food poisoning from products sold by
the entity. Legal proceedings are started seeking
damages from the entity but it disputes liability. Up
to the date of authorisation of the financial
statements for the year to 31.03.2008 for issue, the
entity’s lawyers advise that it is probable that the
entity will not be found liable. However, when the
entity prepares the financial statements for the year
to 31.03.2009, its lawyers advise that, owing to
developments in the case, it is probable that the
entity will be found liable.
D 6 – A court case – At 31.03.2008
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Present obligation as a result of a past
obligating event:
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On the basis of the evidence available when the
financial statements were approved, there is no
obligation as a result of past events.
Conclusion:
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No provision is recognised.
The matter is disclosed as a contingent liability
unless the probability of any outflow is regarded
as remote
D 6 – A court case – At 31.03.2009
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Present obligation as a result of a past
obligating event:
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An outflow of resources embodying economic
benefits in settlement:
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On the basis of the evidence available, there is a
present obligation.
Probable.
Conclusion:
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A provision is recognised for the best estimate of
the amount to settle the obligation.
Discussion 7 – Refurbishment costs – no
legislative requirement
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A furnace has a lining that needs to be
replaced every five years for technical
reasons. At the end of the reporting period,
the lining has been in use for three years.
D 7 – Refurbishment costs – no legislative
requirement
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Present obligation as a result of a past obligating event:
 There is no present obligation.
Conclusion:
 No provision is recognised
 The cost of replacing the lining is not recognised because,
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at the end of the reporting period, no obligation to replace the lining
exists independently of the company’s future actions—
even the intention to incur the expenditure depends on the company
deciding to continue operating the furnace or to replace the lining.
Instead of a provision being recognised, the depreciation of the lining
takes account of its consumption, ie it is depreciated over five years.
The re-lining costs then incurred are capitalised with the consumption
of each new lining shown by depreciation over the subsequent five
years.
D 8 – Refurbishments costs – legislative
requirement
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An airline is required by law to overhaul its
aircraft every three years.
Discussion 8 – Refurbishments costs –
legislative requirement
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Present obligation as a result of a past obligating event:
 There is no present obligation.
Conclusion:
 No provision is recognised.
 The costs of overhauling aircraft are not recognised as a
provision for the same reasons as the cost of replacing the lining
is not recognised as a provision in preceding discussion.
 Even a legal requirement to overhaul does not make the costs of
overhaul a liability, because
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no obligation exists to overhaul the aircraft independently of the
entity’s future actions—the entity could avoid the future expenditure
by its future actions, for example by selling the aircraft.
Instead of a provision being recognised, the depreciation of the
aircraft takes account of the future incidence of maintenance costs, ie
an amount equivalent to the expected maintenance costs is
depreciated over three years.
Disclosures
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For each class of provision, an entity shall disclose:
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the carrying amount at the beginning and end of the period;
additional provisions made in the period, including
increases to existing provisions;
amounts used (ie incurred and charged against the
provision) during the period ;
unused amounts reversed during the period ; and
the increase during the period in the discounted amount
arising from the passage of time and the effect of any
change in the discount rate.
Comparative information is not required.
Disclosures - contd
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An entity shall also disclose the following for each
class of provision:
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a brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic
benefits;
an indication of the uncertainties about the amount or
timing of those outflows. Where necessary to provide
adequate information, an entity shall disclose the major
assumptions made concerning future events; and
the amount of any expected reimbursement, stating the
amount of any asset that has been recognised for that
expected reimbursement.
Contingent Liabilities
Contingent Liabilities
Definition
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A contingent liability is
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A possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events
not wholly within the control of the entity;
or
A present obligation that arises from past events but is not
recognized because:
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It is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation;
or
The amount of obligation cannot be measured with sufficient
reliability
Provisions v Contingent Liabilities
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Both are uncertain in timing or amount
Contingent liability is dependant on
occurrence or non-occurrence of one / more
uncertain future events not in control of entity
Recognition
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An entity shall not recognize a contingent
liability
Disclosures
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Unless the possibility of any outflow in settlement is
remote,
an entity shall disclose for each class of contingent
liability at the end of the reporting period
a brief description of the nature of the contingent
liability and, where practicable:
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an estimate of its financial effect;
an indication of the uncertainties relating to the amount or
timing of any outflow; and
the possibility of any reimbursement.
Contingent Assets
Contingent Assets
Definition
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A contingent asset is a possible asset that
arises from past events and whose existence
will be confirmed only by the occurrence or
non-occurrence of one or more uncertain
future events not wholly within the control of
the entity
Recognition
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An entity shall not recognize a contingent
asset
Disclosures
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Where an inflow of economic benefits is probable,
an entity shall disclose
a brief description of the nature of the contingent
assets at the end of the reporting period, and,
where practicable, an estimate of their financial
effect.
It is important that disclosures for contingent assets
avoid giving misleading indications of the likelihood
of income arising.
Thank You
[email protected]
9810013524
IFRIC 1
Scope
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Changes in measurement of any existing
decommissioning, restoration or similar
liability that is
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Recognized as part of the cost of PPE – as per
IAS 16
Recognized as a liability – as per IAS 37
Cost Model
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Add / deduct to carrying amount
Test for impairment – if add to carrying
amount
Revaluation Model
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Adjust from Revaluation Surplus
Any excess / deficit to PL
Unwinding of Discount
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Finance Cost
Recognize in PL